4 Steps to Grow a Million-Dollar 401(k)

There’s a reason why ABC created the show Who Wants to Be a Millionaire. It’s because the answer is ... pretty much everyone.

While money isn’t the key to true happiness, it sure does help when it’s time to pay bills. It also ensures we can live comfortably, especially in retirement.

Outside of hitting Mega Millions or catching the next cryptocurrency wave in its infancy, it’s difficult to become a millionaire. However, growing a $1 Million retirement portfolio is a very real possibility — especially for younger generations who have more time to save and invest.

Following these four strategies can help you turn your modest 401(k) into a $1 Million nest egg.

The $1 Million 401(k)

The current extended bull stock market has created more retirement wealth than in any previous generation. According to Fidelity, there was a record of 233,000 401(k) account holders who hit the magical $1 Million mark in retirement assets in the fourth quarter of 2019. That’s a 39% increase from the same period a year earlier. Most people, however, aren’t nearly as fortunate. Here are the average 401(k) balances by age:

20–29: $11,500

30–39: $42,400

40–49: $102,700

50–59: $174,100

60–69: $195,500

Ready to move your modest 401(k) out of the average range and into exceptional territory? Read on.

Step 1: Tap Employer-Matching Contributions

Employer match is unequivocally the best return on investment offered. The most common match formula is for employers to contribute dollar-for-dollar up to a maximum amount. The second-most common formula is a 50% employer match on employee contributions to their 401(k).

When an employee puts $1 into their 401(k), their employer matches that $1 contribution, or puts in $0.50 based on the second formula. Although some 401(k)s don’t have an employer-match option, this is without a doubt one of the most strategic moves employees can make and can quick-start a larger retirement portfolio. Always take advantage of the employer-match option when available.

Step 2: Start Early

This step actually is interchangeable with step 1. The only way to truly grow a large retirement portfolio is to start early and contribute often. Too many Americans haven’t properly planned for their retirement — according to Fidelity, Americans at age 67 should have 10 times their final annual salary in retirement savings. The only way to hit that number is to begin early.

Here are some retirement savings guidelines:

20s: Save up to your annual salary by the time you hit age 30

40s: Three times your annual salary in savings

50s: Six times your annual salary

60s: Eight times your annual salary

Under this savings timeline, you will have saved 10 times your annual salary at age 67 with the compound interest.

Compound interest is another free way to substantially grow your portfolio. Retirement accounts such as Rocket Dollar’s Self-Directed Solo 401(k) and Self-Directed IRA aren’t just savings accounts — they are used for active investments that provide returns which grow the amount of your initial savings. Due to the power of compound interest, that money in turn generates interest on itself and continues to grow. Over time, compound interest can dramatically increase your overall retirement wealth — every dollar you contribute and invest today equals hundreds of dollars when you retire.

Step 3: Minimize Fees & Follow the Index

Minimizing fees over time as you adjust your investment strategies is crucial to maintaining retirement wealth. Fees can significantly water down the strength of returns on your investments.

One way to minimize fees is to pay careful attention to who manages your money, where it’s invested, and how much it’s costing you to invest. In the past five years, there’s been a glut of fee-based robo-advisers that provide investment advice. However, you can always stick with the investment advice of Eugene Fama, Robert Shiller and Lars Peter Hansen, who won the 2013 Nobel Prize in Economics. The trio says to use broad-based index funds to build a balanced portfolio, and their theory consistently holds up. Since these funds are not managed, investors don’t have to pay stiff fees to investment advisors or money managers.

Step 4: 21st Century Diversification

Steps 1-3 are the basic tenets of any solidly built retirement portfolio. However, it’s crucial that retirement investors spread their wealth among a diverse range of alternative assets to avoid economic and market volatility. While investors are riding high with the Dow Jones Industrial Average topping 26,000, it’s important to remember that less than a decade ago in March of 2009, the DJIA was 6,507. Those kinds of bear swings shave trillions off retirement portfolios.

A well-balanced 21st Century Portfolio that hedges against market volatility includes alternative investment in certain hard assets, such as multi-family real estate, cryptocurrency, crowdfunding, peer-to-peer loans, angel investments, and small business loans. These assets shelter investors from the brutal losses that follow inevitable bear runs in the stock markets.

Investors can use their Rocket Dollar Self-Directed Retirement Accounts to make these types of investments and many others not available in company-sponsored 401(k) retirement plans.

Following these four fundamentals will help grow any type of 401(k) retirement plan. While many of us might not ever cross that magical $1 Million retirement threshold, adherence to these four tenets of retirement savings and investing will ensure rosier retirement finances regardless of where you are in your financial journey.

Learn more in The Rocket Dollar Guide to Self-Directed Retirement Plans